The main reason that companies choose to participate in the FCPA’s voluntary disclosure program is because when they do, they can minimize their financial losses. FCPA disgorgement and restitution costs are always much higher than the fines that are levied. However, a recent Supreme Court decision has put a ticking clock on these disgorgements, which could completely change how these actions are enforced.
Disgorgement, or the process of giving up assets obtained through illicit means, has always been a contentious issue. This was highlighted in the recent case of Kokesh v. SEC, where it was decided that a 5-year statute of limitations applies to disgorgement of assets. This was such a pivotal decision that many firms are reviewing their FCPA compliance programs as well as their policies on voluntary reporting.
How Kokesh Created a 5-Year SOL
The definition of disgorgement is pretty simple—it’s the process that’s not. Disgorgement is giving up all the profits from an illicit act. For example, say you bribe a foreign official to get a project that profits your firm to the tune of $1m. Your firm voluntarily discloses, gives up the $1 million profit and is back to the same place it was prior to the illicit act, known as the status quo.
However, there are instances where disgorgement can actually lead a company to lose more than they gained in profit. Consider the scenario above. Only this time, the company takes that $1 million and invests it. Over a period of 10 years, an additional $1,000,000 in interest is gained because of those funds. So, as far as disgorgement goes, some would say that the total amount to be disgorged would be $2,000,000 and not the original million.
In Kokesh v. SEC, the primary issue is that time complicates money. Initially, Kokesh, an investment banker, was ordered to pay $34.9 million in disgorgement and $18.1 million in interest prior to the judgment. Kokesh argued against both these amounts, as many of them involved trades that occurred in the late 90s and early 2000s. He stated that the disgorgement was a penalty, and as such was blocked by the 5-year statute of limitations on these penalties. The Supreme Court agreed for the following reasons:
- Disgorgement funds are not given to victims – This is especially true in FCPA violations, where both sides of the transaction are in the wrong. When a firm disgorges funds, those funds are paid to the Treasury, as there’s no specific victim.
- The SEC was seeking disgorgement in a punitive manner – Disgorgement isn’t usually punitive. Instead, it’s simply a remedy where a person gives back what they took. However, the SEC was using disgorgement to prevent other financial advisors from behaving the same way. This creates a situation where it was viewed as a penalty, as the amount levied was designed to be a deterrent.
- Disgorgement is based on a wrong to the public, not individuals – Again, in FCPA enforcement, the issue is the damage that unethical foreign transactions create for the economy at large, not for individuals. Because of this, disgorged funds are given to the Treasury—an organization not directly injured in the act.
These three reasons were the key findings that the Supreme Court used to determine that disgorgement in the Kokesh case was a penalty, and as such was limited by a 5-year statute of limitations on these penalties. This is potentially good news for businesses who may have been wary of participating in the voluntary disclosure program, but it’s also likely to ramp up FCPA actions.
How Kokesh impacts SEC and FCPA investigations
While the statute of limitations prevents companies from having to pay hundreds of millions in disgorgement based on a small initial transaction, it’s also placed a ticking clock on those who investigate these cases. This means that it’s likely investigating authorities will ramp up investigations in order to avoid coming up against the statute of limitations. It essentially gives firms more leverage in negotiating settlements for voluntary disclosures as well. Companies that could be impacted by FCPA and SEC actions should:
- Review any current disgorgement agreements – The decision in Kokesh has the potential to impact any recent voluntary disclosure programs entered in relation to the voluntary disclosure program. Compliance officers should review the details and dates of any cases that could be impacted by the five year SOL.
- Consider the tax implications of disgorgement – Disgorgement losses, when not considered penalties, could potentially offer a tax write off for businesses. However, if the disgorgement is considered a penalty, it cannot be written off.
- Do a compliance spot check – This decision will likely push regulatory agencies to settle cases faster. As the SOL starts on the date that the action occurs, this could be the ideal time to determine if there are any potential issues out there which you could get settled quickly through the voluntary disclosure program.
The Supreme Court’s decision on Kokesh is going to impact all financial firms out there, including any of those considering participating in the voluntary FCPA disclosure program. As such, be sure that you have your details in order so you can take advantage of this positive turn.
AC Global Risk can help get you started using Remote Risk Assessment (RRA) to do a compliance spot check, which will tell you about any potential risks in your company. This is particularly useful in foreign markets, where employees may be working remotely with little oversight. Our technology can be adapted to work in any location, in any language. For more information on our risk solutions, contact us.